A stable income is critical to a comfortable retirement – as is limiting the amount of that income that you give to Uncle Sam. Maximizing retirement income and minimizing taxes requires advance planning – as illustrated in these seven tips.
1. Use a Roth IRA
Because Roth IRAs are funded with post-tax dollars, they are flexible retirement income sources and excellent for plugging retirement income gaps. You may draw contributions out at any time and earnings may be withdrawn tax-free if you are at least age 59½ and have had the account for at least five years.
Roth IRA contributions are less attractive when you are in higher-earning years where a high tax bracket applies. Contribute to a Roth IRA when tax conditions are favorable or convert a traditional IRA to a Roth IRA in a year where your adjusted gross income (AGI) is low, taking the tax hit while you’re in a lower tax bracket.
2. Balance Social Security Benefits and Earnings
If your combined income, defined as adjusted gross income (AGI) plus non-taxable interest plus half your Social Security benefits, is above certain thresholds, either 50% or 85% of your Social Security benefits are subject to income tax. Balance out your income during retirement with income from a Roth IRA, which does not increase your AGI. “The thresholds where you start getting tax paid on Social Security benefits haven’t changed in well over 20 years,” says Betterment Head of Tax Eric Bronnenkant. “Assuming that everything else in your life rises with inflation, then more and more people are…